CHAPTER 24
LIABILITY OF PRINCIPALS AND AGENTS TO THIRD PARTIES
Outline
I.Introduction
This chapter examines the various types of liability that principals and agents may owe to third parties who deal with the agency.
II.The Agent’s Authority to Bind the Principal to Contracts
The agent's authority is either actual or apparent. It may also arise as a result of ratification of the agent's actions by the principal.
A.Actual Authority
1.Express Authority
Express authority arises from express language in an agency agreement—for example, a power of attorney is an express agency agreement.
2.Implied Authority
Implied authority arises because an agent possesses the implied authority to do whatever is reasonably necessary to accomplish the objectives of the agency. The test is the "justifiable belief of the agent."
B.Apparent Authority
Apparent authority is based on conduct by the principal that causes a third person to reasonably believe an agency exists. The test is the "justifiable belief of the third party."
Example: Ophthalmic Surgeons v. Paychex: The court found that OSL created apparent authority in Conner and Paychex reasonably relied on her authority to issue additional paychecks.
C. Ratification
Ratification occurs when a principal authorizes an act of an agent after the act was done. Test is the "intention of the principal."
Example: North American Specialty Insurance v. Employer’s Reinsurance: NAS accepted and retained payment of the premiums on bonds that it knew were unauthorized when they were issued. When 12 of the bonds resulted in defaults, NAS argued that it was not responsible to pay the claims on them because they were unauthorized. The court disagreed, saying that NAS impliedly ratified the unauthorized issuance when it accepted the premiums.
1.Requires proof that the agent acted on behalf of the principal and principal had capacity to act.
III. Related Contractual Liability Issues
A.Principal’s Liability for the Agent’s Representation
Principal is generally bound by agent's representations if the agent had express, implied, or apparent authority to make such statements. The principal is generally liable for misrepresentations made by the agent under these theories.
1.A principal may give notice of lack of agent's authority through an exculpatory clause. However, many courts permit a third party to rescind a contract for misrepresentation even though the contract contains such a clause.
B.Principal’s Liability for Notice and Payments to the Agent
Payments to the agent discharge debt to the principal; the principal is not bound if the agent colludes with the third party to withhold such payments from the principal.
Example: NCP Litigation Trust v. KPMG LLP: The court found that KPMG could not protect itself from negligence by using the imputation doctrine. This doctrine states that principals are deemed to know facts which are known to the agent. The purpose of the doctrine is to protect third parties not the agents themselves.
IV.Principal’s Liability for Acts of Subagents
A. Agent’s Authority to Appoint Subagents
A subagent is an agent of the agent. Both the principal and agent may be bound by the authorized acts of the subagent.
B.Agents May Have Employees
Ministerial acts are acts that have been delegated from agents to their employees. The principal is normally not bound by acts of agent’s employees unless those employees are in fact subagents.
V.Contract Liability of the Agent
A.Introduction
Generally, the agent is not liable for the contracts made on behalf of the principal. Exceptions include: unauthorized actions by the agent, nonexistent or incompetent principals, and agreements by the agent to assume liability, undisclosed or partially disclosed principal.
B.Unauthorized Actions
Liability is imposed on an agent who has exceeded his authority based on an implied warranty of authority.
C.Nonexistent or Incompetent Principal
If the principal is not in existence or is incompetent, the agent is liable. In addition, an agent may become a party to a contract along with the principal, thus assuming liability.
D.Agreements by the Agent to Assume Liability
An agent may agree to enter into contracts in her own name, become a party to a contract along with the principal, or become a surety to a contract.
E.Disclosed Principal
If the third party knows an agency relations exists and also knows the identity of the principal, the principal is disclosed. The contract is between the principal and third party.
F.Undisclosed Principal
If the third party is unaware an agency exists and believes the agent is actually the principal, the principal is undisclosed. To protect the third party, the agent is liable (but the agent may be entitled to indemnification from the principal).
Example: Treadwell v. J.D. Construction: The agent is liable on the contract because the principal was undisclosed to the third party.
G.Partially Disclosed Principal
A principal is partially disclosed when the third person knows he is dealing with an agent but does not know the identity of the principal. The agent is liable on contracts on behalf of a partially disclosed principal.
VI. Liability for Torts and Crimes
When an agent commits a tort or crime, the agent is personally liable for the consequences. The principal may also be liable for the torts and crimes committed by his agent.
A.Respondeat Superior
Principals (generally employers of tort-feasing employees) may be liable to third persons injured by the torts of their agents under this theory of imputed liability.
Example: Roberts v. Danner: The court found that Danner’s actions were not within the scope of employment. Respondeat superior does not apply and H-40 is not liable.
B.Direct Liability
Under direct liability the principal was directly liable because of its own tort. For example, negligent hiring or supervising the agent is a tort.
Example: TGM Ashley Lakes v. Jennings: Jennings was murdered in an apartment by a man employed by her landlord. If the landlord had checked out the man’s criminal history, it would have discovered that he had spent much of his adult life in prison for felony convictions, including rape. The man had keys to Jennings’s apartment, despite the fact that the apartment complex had had numerous unforced entries and burglaries during the six months before the murder. The court found the landlord liable for Jennings’s murder under a theory of direct liability. This is because it was negligent in its hiring and supervision of the murderer.
C. Criminal Liability
When a principal instructs her agent to commit a crime, the agent is under no legal obligation to obey. If the agent does commit the crime, the agent will be guilty of the crime.
Learning Objectives
1.You should understand the difference between duties and liabilities of an agent regarding a principal, and that of an agent and principal to third parties.
2.You should understand the different legal implications of an express, implied, and apparent agency.
3.You should understand the concept of respondeat superior and the difference between and employee and independent contractor.
4.You should understand the circumstances under which a principal may be directly liable for the torts of his agent.
5.You should know how apparent authority may arise, and should recognize that where the agent possessed apparent authority, the principal's liability to third persons is the same as if there had been actual authority.
6.You should understand how ratification of an unauthorized act may occur, and what the effect of ratification is.
7.You should be able to distinguish among agencies involving disclosed, undisclosed, and partially disclosed principals. It is also important that you be familiar with the liability the principal and the agent may face in each of these three agency situations.
8.You should understand the liability of the agent to third persons when the agent has committed unauthorized acts, and should know why the agent is obligated to indemnify the principal when the principal is held liable to the third party in cases involving apparent authority.
9.You should become familiar with the rules governing when a principal is held accountable for the representations of an agent. You should also understand how a properly constructed exculpatory clause may minimize, for principals, problems of this nature.
10.You should know how to determine whether information given to an agent is considered notice to the principal.
Learning Hints
1. Whether a principal will be bound to a third party on contracts made by an agent depends on the agent's authority to act for the principal. That authority may be express, implied, or apparent.
2.A principal may also be bound on contracts if he/she ratifies the acts of the agent.
3.Generally, a principal will be liable for representations made by the agent, if those representations were made with authority.
4.Whether an agent is personally bound on contracts made on behalf of a principal depends on whether the principal was disclosed to the third party.
5.A principal may be liable for the torts of his/her agent under the theory of direct liability, or respondeat superior.
6.Remember that an agent may have authority to bind the principal even though the principal has not specifically authorized the agent to do the particular act done by the agent. The doctrines of implied authority and apparent authority, if made applicable by the facts of a given case, may lead to the kind of result described in the preceding sentence.
7.The legal effect of the agent's authorized actions is, in most circumstances, that the principal is bound to the same degree the principal would have been bound if the principal had done the act personally.
8.The principal is the source of actual authority and apparent authority. Both actual authority (which may be express or implied) and apparent authority depend upon some action or inaction by the principal.
9.It will be easier for you to distinguish between implied authority (which is a form of actual authority) and apparent authority if you learn the respective tests for each. The test for implied authority is the justifiable belief of the agent, whereas the test for apparent authority is the justifiable belief of the third person with whom the supposed agent dealt. In either situation, however, the justifiable belief must stem from something the principal has said or done, or has failed to say or do. It is in that sense that the principal is the source of all authority.
10.The agent assumes certain risks when she is part of an undisclosed or partially disclosed agency. The foremost risk is that the agent may be held liable if the principal fails to perform. There is some consolation for the agent in that if the agent acted with authority, the agent has a right to be indemnified by the principal in the event that the agent is held liable to the third person. This will be small consolation, however, if the principal's reason for failing to perform the principal's obligation to the third person was the principal's weak financial position or, worse yet, the principal's bankruptcy. In those situations, the agent's right to be indemnified by the principal may become virtually meaningless.
11.When an agent performs unauthorized acts or makes unauthorized representations, the agent, rather than the principal, is the party who is liable to the third person with whom the agent dealt. The principal cannot be held liable to the third person where the principal has done nothing to create actual authority or provide the basis for apparent authority. If the agent had no actual authority but did possess apparent authority, the principal will be liable to the third person, but the agent, in turn, will have an obligation to indemnify the principal.
12.When the agent "represents" a nonexistent or incompetent principal, the agent clearly is the party who will be liable to the third person with whom the agent dealt. In such an instance, there is no principal with legal capacity to be bound by any contract.
13.Be certain to remember that notice given to an agent is considered as notice to the principal only if the information relates to the business of the agency. Therefore, in determining whether a third person's giving of notice to an agent constitutes notice to the principal, one ordinarily must do more than merely inquire as to whether the party receiving the notice was an agent of the principal. It is usually necessary to make a further inquiry concerning whether the information given to the agent by the third person pertained to the business of that particular agent's relationship with the principal.
14.It is logical that a principal is not bound by an agent's action where the agent was involved in a conflict of interest situation of which the third person was aware. The agent has a conflict of interest when he is acting to serve his own interests or those of the third party, rather than those of the principal. As you have already learned, an agent is to subordinate his own interests to those of the principal. If the third person with whom the agent dealt is aware of the conflict or is an active participant in it, the agent's action cannot be said to have been taken with apparent authority, because the third person could not have had a justifiable belief that the agent was authorized to take such an action.
15.The difference between direct liability and liability under respondeat superior is that with direct liability, the principal really is being held accountable for her own tort or wrongdoing, not necessarily for that of the agent. Perhaps the agent did commit a tort (for which the agent himself will be liable), but the principal may have committed a separate tort by being negligent in supervising the agent or by being involved in the agent's wrongdoing--such as by directing the agent to commit the tortious act. Imposing direct liability on the principal would be appropriate in such instances. Of course, the agent would also be liable for his tort. Holding a principal liable on the basis of respondeat superior is something different. Under respondeat superior, the principal is held liable for the torts of her employees if the torts were committed in the scope of employment. No active fault or wrongdoing on the part of the principal is required. Respondeat superior is grounded on the public policy of giving injured third persons another, presumably, financially responsible party to look to besides the employee for payment of the injured parties' damages. Once again, even if the principal is held liable under respondeat superior, the employee who actually committed the tort is held liable in his own right.
True-False
In the blank provided, put "T" if the statement is True or "F" if the statement is False.
_____1.It was once difficult to convict the employer for a crime committed by an employee; however, newly revised criminal codes are more likely to impose such liability.
_____2.Art signs a contract as a real estate agent to sell Deb’s house. This is an example of express authority.
_____3.An agent has the implied authority to do whatever is reasonably necessary to accomplish the purposes of the agency.
_____4.Apparent authority protects the agent from liability for unauthorized acts of a principal.
_____5.Ministerial acts may be delegated by an agent to her employees.
_____6.A bar owner may be liable for one of his employees assaulting a patron under the doctrine of respondeat superior.
_____7.If an agent represents an unincorporated association, the agent will be personally liable to the third person with whom the agent dealt in the event that the association fails to perform.
_____8.It is possible that one may be liable for the acts of someone posing as her agent, even though no actual authority had been given to the person who posed as the agent.
_____9.The rights and duties of the parties when the principal is partially disclosed are essentially the same as when the principal is disclosed.
_____10.A principal must fully understand the legal significance of all material facts before ratifying the acts of an agent.
Multiple Choice
Circle the best answer.
1.Jane was hired as a janitor for a local cleaning service. While cleaning a client's home, she negligently left a bucket of water in front of the front door. When the client came home from work, she slipped and fell over the bucket. Who may the client sue, if any?
a.Only the agent (Jane) is liable for her own torts.
b.Only the principal (the cleaning service) is liable for the negligent acts of its agents.
c.Both Jane and the cleaning service may be liable.
d.Neither is liable, because a principal and agent are only liable for intentional, not negligent torts.
2.Pam asks Olivia to sell her house for her while Pam is in Australia for one year. The agreement is in writing. Which of the following statements is not true concerning this arrangement?
a.Olivia possesses express authority to sell Pam’s house.
b.Olivia possesses apparent authority to sell Pam’s house.
c.Olivia is probably an attorney-in-fact for Pam.